By Cindy Ballard
Executive Vice President, PULSE
Change is inevitable and creates uncertainties. Yet change also provides many opportunities for growth and success. A successful outcome ultimately depends on how a given situation is approached and managed. The current state of our economy demonstrates how important resiliency is for success during times of change. There is no better proof of that than with the payments industry and the use of debit. In the midst of economic turmoil, regulatory challenges and fraud, debit has remained the preferred payment option among consumers and is expected to continue to grow over time.
What’s Driving Debit Use
U.S. consumers make billions of payments each year using their debit cards. From 2006 to 2009, debit use grew from 25 billion payments to 37.9 billion payments – nearly a 15 percent increase.1 And, financial institutions predict both PIN and signature debit transactions to increase by seven percent this year according to the 2011 Debit Issuer Study, commissioned by PULSE.
When it comes to noncash, debit cards are the fastest growing way to pay. What’s driving the growth? The answer is simple – a lifestyle.
Technological advancements have generated a shift in the way consumers live, work and play. Specifically, today’s consumers are more mobile and want instant, easy access to their money. Because debit is convenient and easy to use, it is the ideal method of payment for an on-the-go lifestyle. Debit also provides a certain measure of budget management – a “pay-as-you-go” approach of only being able to spend what is in their account – that also appeals to many consumers.
Debit is quickly becoming the payment method of choice, evidenced by in the fact that consumers conducted eight percent more PIN transactions and 10 percent more signature transactions in 2010 than in 2009, even as the U.S. economy continued to struggle.
As consumers scale back spending during the recession, they use debit more often for small-ticket purchases under $20, and show a continued preference for using debit instead of cash. While consumers use their debit cards to pay for both big and small everyday expenses, it has been those small-ticket purchases, such as a grande latte at Starbucks or a Big Mac at McDonald’s, that have dominated debit growth over the past couple of years. It also is worth noting that the average ticket size for both PIN debit and signature debit, as reported by the Debit Issuer Study, was up slightly last year for each.
Impact of regulatory pressures and fraud
During uncertain times and in an uncertain market, debit issuers are exploring ways to boost issuance and the use of debit to offset regulatory pressures and fraud. It is no surprise that Debit Issuer Study respondents cited the Durbin Amendment and Reg E as the biggest challenges for their businesses moving forward. According to the study, overdraft revenue has already declined by about 45 percent due to Reg E, and financial institutions with $10 billion or more in assets are bracing themselves for a significant loss in debit interchange revenue due to Durbin. And, even though small issuers are exempt from the Fed’s interchange fee restrictions, regulatory changes will impact those institutions. Still, respondents from the study report that their outlook for debit remains positive.
According to the study, fraud also continues to be a major concern for financial institutions, as 94 percent of issuers reported being affected by a breach last year. But results show that of the 94 percent, only nine percent of issuers’ cards were compromised, and only two percent of their actual card base experienced fraudulent transactions. Issuers reported a 78 percent recovery rate on PIN losses and recovery rates for gross signature debit losses remained consistent at around 56 percent. More than half of responding issuers believe fraud rates will increase in 2011. While there is still work to be done, strides continue to be made in combating fraud and in maintaining the safety and security that debit affords consumers.
Fostering Growth in a Post-Durbin Environment
Bottom line – consumers want to use debit and will drive its continued growth. Keeping this top of mind, financial institutions must prepare to address consumer needs, even after the regulatory dust has settled.
According to the study, issuers are focusing on improving the penetration, adoption and usage of debit to sustain its momentum. In order to best accomplish this goal, financial institutions can take several proactive steps to ensure debit continues to be a vital loyalty and revenue-building tool.
- Issuers can gain valuable insights into their debit portfolios by analyzing their own card data. Segment customers based on demographics, purchasing habits, preference for PIN or signature debit, ATM usage and other account information. Analytics will be increasingly important as the economics for debit are challenged.
- Using the results of customer segmentation and pricing work, issuers should develop a plan to design account offerings that fit the specific behaviors of each segment. Products, marketing tactics and pricing scenarios must speak directly to individual customer segments.
- Issuers must thoroughly evaluate their debit program and make certain they understand all revenue and cost components associated with debit. Take a close look at costs for fraud mitigation and actual fraud losses, transaction processing, network services, card production and delivery, rewards and customer service. Evaluate PIN and signature debit separately, since PIN can have some cost advantages such as lower processing costs, fewer chargebacks and lower fraud costs.
Flexibility and a strategic plan of action are critical in today’s changing environment. The payments industry and debit card usage have proven their resiliency as market forces and government regulations force adjustments. Financial institutions fulfill an important need with their debit programs and, despite the challenges, believe that debit is poised for continued growth.
Cindy Ballard serves as Executive Vice President of Communications, Marketing and Administration for PULSE, a Discover Financial Services company and operator of the PULSE® electronic funds transfer network, headquartered in Houston, Texas.
1- 2010 Federal Reserve Payments Study